On April 11, 2023, Arkansas Governor Sarah Huckabee Sanders signed into law Senate Bill 383 (“SB 383”) which seeks to restrict certain foreign investments in land located within the state. Since January 2023, the majority of states have proposed at least one piece of legislation to prohibit or restrict foreign investments and landholdings in land within the boundaries of their states to some degree. Arkansas is one of approximately twelve states—along with Alabama, Florida, Idaho, Louisiana, Montana, North Dakota, Ohio, Oklahoma, Tennessee, Utah, Virginia—to enact a law that seeks to restrict certain foreign investments in land located within their state during the 2023 legislative session. Recently, Arkansas became the first in the nation to enforce a state foreign ownership law when the state’s attorney general ordered a subsidiary of Syngenta Seeds—which is a Chinese-owned company—to divest itself of farmland it owned within the state.
This is the first of two articles discussing Arkansas’ newly enacted foreign ownership law. This article explains which foreign investors are prohibited from acquiring agricultural land located within the state and the exceptions to this restriction. The second article will discuss the investigation, enforcement, and penalty provisions contained under the law and the law’s restriction on purchases of any Arkansas real property by certain business entities.
Background
In 2021, the Arkansas state legislature introduced Senate Bill 312 (“SB 312”) that, under the original version of the bill, included identical language and provisions contained in Missouri’s foreign ownership law. The Arkansas legislature enacted SB 312, which is codified at Ark. Code Ann. § 2-3-111, but the law is entirely different from the original version that was proposed. In fact, the law does not restrict foreign ownership of agricultural land. Rather, the new law simply requires certain “foreign persons” to report their ownership interest in agricultural land within the state to the Secretary of the Arkansas Department of Agriculture. Essentially, this reporting requirement corresponds with the federal reporting law under the Agricultural Foreign Investment Disclosure Act (“AFIDA”) of 1978.
In 2023, the Arkansas state legislature considered four measures (HB 1255; HB 1479; SB 340; SB 383) that sought to restrict certain foreign investments in agricultural land or real estate located within the state. These bills contained similar provisions, but there were some aspects of each bill that differed from the others. Of these four proposals, the Arkansas legislature enacted SB 383 (which is codified at Ark. Code Ann. §§ 18-11-101(a), -110; §§ 18-11-801–805). This law creates two separate prohibitions on foreign investments: (1) a restriction on agricultural land investments and (2) a restriction on certain foreign business entities from acquiring any real property located within the state. This article discusses the agricultural land restriction prescribed under the law.
Agricultural Land Restriction
Section 18-11-803(a)(1) of Arkansas’ foreign ownership law provides that a “prohibited foreign party” (“PFP”) may not acquire any interest in agricultural land located within the state even if the PFP intends to use the land for nonfarming purposes. Like any piece of legislation, the definitions contained under Arkansas’ law are important because they provide context to how the words or phrases are to be understood throughout the legislative text.
Arkansas’ law sets forth a definition of “agricultural land” that is similar to the definition of the term established under the regulations associated with AFIDA. See 7 C.F.R. § 781.2(b). Section 802(1)(A) defines “agricultural land” as land outside the corporate limits of a municipality totaling ten or more acres in the aggregate that is used for forestry production or land currently used, or used within the past five years, for farming, ranching, or timber production. Land totaling less than ten acres in the aggregate that generates annual gross receipts exceeding $1,000 from the sale of agricultural or timber products is considered “agricultural land.” The law does not specify whether “agricultural land” includes public land, private land, or both.
Land used for forestry production is “agricultural land” when ten percent of the land is “stocked by trees of any size, including land that formerly had trees of any size covering the land that will be naturally or artificially regenerated.” Land used for farming, ranching, or timber production includes, without limitation, land used for activities listed under Division A of the U.S. Department of Labor’s Standard Industrial Classification Manual (1987), except for activities set forth in Major Group 7 (Agricultural Services), Industry Group 085 (Forestry Services), and Industry Group 091 (Commercial Fishing). Some activities listed in these classifications include soil preparation services, crop services, other animal services, contracted timber production services, forestry marketing and management plans, and catching or taking of certain fish for a commercial purpose. Accordingly, engaging in these types of activities is not subject to the restriction prescribed under the law.
Because there are several types of interests someone can hold in real property, it is important to understand the types of interests that foreign investors are prohibited from acquiring. Under § 802(3), an “interest in agricultural land” is defined as a “direct interest acquired, transferred, or held in agricultural land”; however, the law does not define “direct interest.” Without a definition, it is unclear what types of interests are “direct interests” in agricultural land. As a result, this law could be construed as to permitting PFPs to obtain land indirectly through a subsidiary or holding company since they are not the party directly purchasing the land.
Further, an “interest in agricultural land” under Arkansas’ law includes leaseholds for one year or longer. This extends to leases that have an option to renew for one year or more and a PFP exercises that option. Overall, PFPs may lease farmland within the state so long as the leasehold interest is less than one year.
Understanding which investors are PFP is crucial to understanding exactly who is prohibited from acquiring an interest in Arkansas farmland. This is especially true under the state’s foreign ownership law because it designates several different types of investors as PFPs. In general, the law specifies six different types of investors that fall within the definition of PFP:
- Individuals that are citizens or residents of a country subject to the federal International Traffic in Arms Regulations (“ITAR”);
- Foreign governments of a country subject to ITAR;
- Legal entities organized under the laws of a foreign government subject to ITAR;
- Entities, including U.S. entities, where a “significant interest or substantial control is directly or indirectly held or is capable of being exercised by” a party, or any combination of the parties, referred to in (1) through (3);
- “Entities of Particular Concern” as designated by the U.S. Secretary of State; and
- Agents, trustees, or other fiduciaries of individuals, governments, or entities specified in (1) through (5) of this list.
A PFP has a “significant interest or substantial control” when they hold 33% or more interest in an entity. Multiple PFPs have a significant interest or substantial control of an entity when they hold, in the aggregate, a 33% or more interest and are “acting in concert.” Two or more PFPs that “may not be acting in concert” have a significant interest or substantial control in an entity when they hold an interest of 50% or more. While PFPs are prohibited from acquiring an interest in Arkansas agricultural land, the law includes some exceptions to the restriction prescribed under the law.
Exceptions
Each states’ foreign ownership law contains some exceptions to the restriction prescribed under their law. Like the states that have a foreign ownership law, Arkansas’ law contains some exceptions. Section 804(a) of the law expressly exempts “resident aliens”, which are non-U.S. citizens who reside within the U.S., from the restriction. Specifically, the law grants PFP resident aliens the right to invest in agricultural land within the state in the same manner as U.S. citizens “during the continuance of his or her residence in the State of Arkansas.” In other words, a PFP with a principal dwelling located within Arkansas is not subject to the restriction and may invest in agricultural land within the state. However, once a PFP resident alien no longer resides in Arkansas, they are required to divest any interest they hold in agricultural land within two years. If they fail to do so, the state’s attorney general is authorized to file a lawsuit seeking judicial foreclosure on the agricultural land held in violation of the law (i.e., require the land be sold at a publication auction).
The law also exempts PFP interests in minerals underlying farmland. Section 802(1)(B) expressly excludes minerals such as oil and gas from the definition of “agricultural land.” Accordingly, PFP interests and leaseholds in mineral rights underlying agricultural land are likely not subject to the restriction. Further, the law also exempts PFP leaseholds in farmland that are less than one year.
Arkansas’ foreign ownership law does not contain some common exceptions that appear in other states’ laws. For example, many states’ foreign ownership laws have a grandfather clause or exempt any foreign-owned farmland before the enactment date of the law to continue to hold. Arkansas’ law does not expressly contain a grandfather clause, which means there is possibly some uncertainty as to whether PFPs may continue to hold agricultural land they acquired before the effective date of the law.
The law also contains no exemptions for research and experimentation. Generally, these types of exceptions are important for foreign-owned businesses that require research and testing of agricultural products, such as crop protection companies. Without an exception, certain foreign-owned ag tech and crop protection companies are likely unable to establish or expand operations within the state of Arkansas.
Conclusion
In 2023, Arkansas enacted a law restricting certain foreign investments in land located within their state. Specifically, the law created two separate prohibitions: one that restricts a PFP from acquiring agricultural land, and the second restricts a “prohibited foreign-party-controlled business” from acquiring any real property within the state, which is the topic of the second article of this series. On October 17, 2023, Arkansas’ attorney general ordered a subsidiary of Syngenta Seeds, a company ultimately owned by a Chinese state-owned entity, to divest its ownership interest in about 160 acres of agricultural land due to the restriction prescribed under the state’s newly enacted foreign ownership law. As a result, Arkansas is the first in the nation to enforce a state law banning certain foreign entities from owning agricultural land. The state also imposed a $280,000 penalty on Syngenta for failing to file a required notice of their landholdings to the Arkansas Department of Agriculture as required under the reporting law (Ark. Code Ann. § 2-3-111) enacted by the state legislature in 2021. The company has two years to divest its interest in the land. If the Chinese-owned company fails to divest during that period, the attorney general is authorized to bring a legal action seeking the land be sold at a public auction.
To read Arkansas’ foreign ownership law, click here.
To learn more about foreign ownership of agricultural land, click here.
To view states’ laws regulating foreign ownership of private land, click here.
For other NALC resources on foreign ownership of ag land, click here.
Subscribe to NALC’s bi-weekly newsletter The Feed for recent legal developments affecting agriculture, including foreign ownership of agricultural land here.
For previous issues of The Feed, click here.
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Author: Micah Brown